Lifetime ISA V AVC

Tintin86

Hi,

Some basic facts about my situation:

Age: 33
Salary: £90,000
Pension contribution: 5% of salary
Employer contribution: 10% of my annual salary

At the moment I aim to save 10% of my gross salary per annum (£9,000 in addition to my pension contribution).

I am trying to figure out if it is more efficient for me to pay £4,000 into a lifetime ISA to get the 25% bonus and pay the rest of my savings (£5,000 per annum) to my pension as an AVC or to pay the total amount as an AVC.

Conscious that my marginal tax rate is at the higher rate (AVC better option) but there is also the possibility that in retirement my marginal tax would also be at the higher rate (LISA may be better option?).

Any advice?

Thanks

cloud_dog

Sounds as though you have a good handle on the pluses and minuses between pension contributions and LISA.

The general rule (although nothing is set in stone) is that if you are a HRT then making pension contributions (increased DC, AVCs, SIPP, etc) is the better way to go. This is even more beneficial if your company pays you via salary sacrifice, as there is an additional 2% NI savings on pension contributions.

Having said all that, I think you need to try and decide on what you want the money for. For example if you have no, or insignificant savings then this should be addressed. If you have any large financial commitments in the next few years which need to be funded then this needs to be considered, i.e. not LISA and not pension.

You may also want to think in terms of whether you are likely to want to retire before your normal retirement age?

The bottom line is.... Are you putting money aside for retirement purposes or for other purposes (new house etc).

You have already mentioned splitting the monies across both and I think that might be a reasonable solution but your current and other financial commitments, or commitments in your future also need to be considered.

EDIT: Do you currently own a property?

Tintin86

Thank you cloud dog.

Yes you raise a very valid point re: savings.

I have sufficient savings now for a property + stamp duty which I intend to use to buy a property early next year (I am renting at the moment).

I will then be in a position where I only have c. £7k of savings left.

My plan was to put this £7k into a share ISA so I can access it and continue putting money in until I have 3 months living expenses, then switching to the LISA/AVC savings.

There is a potential I would like to retire early. I would like to at least have the option to retire at 55 so that is another plus for pension.

AlanP_2

Tintin86 wrote: »

Thank you cloud dog.

Yes you raise a very valid point re: savings.

I have sufficient savings now for a property + stamp duty which I intend to use to buy a property early next year (I am renting at the moment).

I will then be in a position where I only have c. £7k of savings left.

My plan was to put this £7k into a share ISA so I can access it and continue putting money in until I have 3 months living expenses, then switching to the LISA/AVC savings.

There is a potential I would like to retire early. I would like to at least have the option to retire at 55 so that is another plus for pension.

Don't put your easy access, Emergency Fund into a S&S anything, keep it as cash.

You could lose your job, be long term ill, buy a house and need a new boiler on Day 2. S&S are for longer term (minimum 5 years say) objectives. 3 months living expenses might be a bit light for an Emergency Fund, 6-12 months might be more prudent. We used to have about 12 months but as we are now of an age when we could take pensions, kids are off our hands, and mortgage is negligible we have reduced this as our risk situation is different to someone [STRIKE]much[/STRIKE] younger just starting out with house purchase and all the costs that can / will go with owning your own property.

Edit - Decided "much younger" didn't do much for my self esteem.

Alexland

Tintin86 wrote: »

Conscious that my marginal tax rate is at the higher rate (AVC better option) but there is also the possibility that in retirement my marginal tax would also be at the higher rate (LISA may be better option?).

Even on £90k is being a higher rate taxpayer in retirement a likely possibility if you are only making a total 15% pension contribution? Do you already have a substantial pension pot or DB scheme behind you? Are you expecting exceptional levels of investment growth above inflation & fees? Maybe you only want to retire at SP age or later? I would increase your pension contributions to avoid higher rate tax. Still depends what else is going on in your life.

Alex